International business Dissertation Example | Topics and Well Written Essays - 1000 words

Global business - Dissertation Example The proposed research is about an examination of the Chinese business condition with a perspective on deciding how worldwide organizations can accomplish successful administration of their tasks inside this market. This examination will be achieved through a logical report through the utilization of exploration approach. The discoveries will be investigated and talked about with a point of responding to the exploration inquiries in the best way. Writing Review In understanding to Pranee (2009, p. 15), the globalization of the world economy has made organizations internationalize with the goal that they would extend their tasks and have a huge offer on the planet showcase. China is a nation with numerous business openings notwithstanding its enormous market. As a result of this numerous worldwide organizations have attempted to contribute their capital inside the Chinese market. Quer, Claver and Rienda (2007, p. 360) clarify that these organizations have anyway been tested by the lawf ul, political, financial and social system inside the Chinese society. Shi and Wright (2001, p. 364) call attention to that past exploration on the Chinese market uncovers that worldwide organizations which have made progress in the Chinese market have accomplished this through the execution of proper methodologies in the administration of global business. ... Furthermore, lawful and political consistence by worldwide organizations in China has assumed a significant job in characterizing the accomplishment of organizations which work in the Chinese market (Pranee, 2009, p. 25). For instance the administration of fruitful worldwide organizations and organizations in China incorporate correspondence and relational connections which are follower to the Chinese social condition. This is significant on the grounds that chiefs of worldwide business in China are ordered to deal with the neighborhood workers successfully to guarantee that they are propelled for imagination, imaginativeness and expanded efficiency (Shi and Wright, 2001, p. 368). All the more altogether, business exchanges of worldwide organizations with their Chinese accomplices must be overseen successfully so as to guarantee achievement of arrangements. Wright, Szeto and Lee (2003, p. 187) exhibits that during dealings, the social conduct of the neighborhood accomplices must be c lung to with respect to correspondence, dressing and meeting behavior. Technique According to Panneerselvam (2004), a blended exploration system is proposed for the examination. Blended exploration techniques incorporate the use of subjective and quantitative examination approaches in a logical report. Through a blended examination philosophy both subjective and quantitative information on the exploration point will be gathered and investigated for conversations and introduction of discoveries. The exploration configuration is a contextual analysis of China. The assortment of information will include optional sources through which assortment of quantifiable and subjective information will be accomplished. This information will be dissected through a near investigation approach with the goal that indisputable proof will be gotten on the best administration approaches in the administration of global business

Entertainment Speech free essay sample

To certain individuals having an infant appears to be easy and direct. That is to say, actually how hard would it be able to be? You should simply hold them, rock them to rest, feed them their jug when they cry and change their diaper a couple of times each day. Who wouldn’t need to bring home that sweet dear baby from the medical clinic, get a flood measure of cards, blessings, home prepared meals and have all the assistance you would require from relatives and companions. Sounds like a really straightforward inquiry to me. I will always remember, I was around fifteen year’s old flying out to Florida to go on a family get-away. Here comes strolling down the path a mother around the age of thirty, alluring, flawless looking face, hair set up in a bun splashed vigorously, wearing studs and rings that were ostentatious to the point that the main thing I could do is stay there and gape. In addition I would have somebody close by supporting me the whole night. Evan and I arranged the entire night from what we were going to wear to supper to the after gathering to remaining over at my home. In any case, all together for this fantasy plan to really work I was going to require my parent’s endorsement. In any case, they didn't realize I was gay, nor did they realize that I had a sweetheart. So as to persuade my dad into letting me do what I needed, I like any youngster realized I needed to suck up to him. Along these lines, I went through a whole day cutting the garden, supporting the shrubs, cutting the roses, planting blossoms, vacuuming, cleaning, revamping, and in conclusion preparing supper. After supper I took my dad outside to give him all the work that I had done. It was evening time and the lights on the house and finishing made a great vibe. Also, following a couple of moments of strolling around and supplementing on the work, I realized that I wasn’t going to have a superior open door then that second. I stopped and looked my dad profound into the eyes, and start by first expressing â€Å"do you vow not to get frantic at me? † I realized I was shaking and my hands started to perspire as he answered with saying â€Å"go on. † The absence of consolation caused my body to go into a free for all, I was shaking steadily as I mumbled â€Å"I’m gay†¦ I like young men. † I unexpectedly felt lighter, as though I achieved the unimaginable. Knowing how understanding my Father was I anticipated that the discussion should go easily after the underlying stun had hit him. Be that as it may, as time went in clumsy quietness. I realized that it wasn’t so. Unexpectedly my dad started to assault me with questions. Why? How would you know? Why don’t you like young ladies? What did I do to make you gay? My heart sank, all the rehearsing and training from guardians, from other gay companions, my beau, his folks, they caused it to appear to be so natural. What's more, here I am with my own dad dismissing me, doubting me as though I was some disappointment. It at long last came down to him asking â€Å"what do you need from me? † The inquiry rang through my head. What do I need from you? I'm not catching your meaning what do I need from you? Nothing had changed. I despite everything need very similar things love regard bolster support. So deftly I said â€Å"support father, I need your help. † After all I realized that coming out to the whole school would have its repercussions and I expected to free numerous companionships. I hung tight for a reaction, till at last he said I can’t bolster your choices Chris, please we will need to tell your progression mother. † After mumbling those equivalent words to her, she tumbled to the ground in an emotional show bellowing her eyes out and quickly started to assault me by asking things like â€Å"so would you say you are simply having an entire bundle of sex when you have folks over? † She even went as far to state that she didn’t need me in a 30-minute range of the house with another person. I at long last understood my folks were humiliated of me. I was harmed. On the off chance that having my mom disclose to me that she doesn’t love me wasn’t terrible enough the last two guardians throughout my life were tearing me down word by word due to my sexual direction. I didn’t request to be brought into the world along these lines. I simply was. Inconsequential to state I wasn’t permitted to go to prom, which prompted one enormous battle with my beau and us separating. Weeks went on and gradually my opportunities were taken away from me: being out past 12 PM, dozing over at places, trips over one day, having fellow companions over, more tasks were included, it just appeared to be unthinkable. At long last, I couldn’t take it any more. The disappointment of not being cheerful defeated me which prompted a four hour contention where I was hit, stifled, slapped, swore at and intellectually mishandled. I had at long last hit my low. I couldn’t stand living with them any more. Furthermore, they couldn’t stand me. When I turned 18 I was confronted with the choice of attempting to make it all alone monetarily and sincerely or keep on living through some serious hardship. I left my parent’s life and now am demonstrating to them and myself that I can do it without them. Since moving out I have discovered another regard for myself and direction. Also, today I can say I am glad for myself. Furthermore, before I end I need to leave you with this, the entirety of our activities have repercussions, ensure you thoroughly consider them before you act. I simply trust that one day my parent’s can think back and ask was it extremely worth loosing a child since he was gay?

Native Son Character Actions Defines Their Individual Essays (1999 wo

Local Son: Character Actions Defines Their Individual Characters and Belief Systems Richard Wright's epic, Native Son, comprised of different principle and supporting character to convey a successful exhibit of characters and articulation. Each character's activities characterizes their individual characters and conviction frameworks. The principle character of Native Son, Bigger Thomas has character qualities crossing different part of human instinct including activities spurred by dread, brisk temper, and a high level of insight. Greater, whom the novel spins around, depicts different character components through his activities. A considerable lot of his activity propose an abrogating reaction to fear, which comes from his presentation to an unforgiving social atmosphere in which an unmistakable line between worthy conduct for white's and dark's exists. His quick annoyance and his dangerous motivations come from that dread what's more, gets evident in the initial scene when he wildly assaults an enormous rodent. The equivalent lethal motivation shows up when his mystery fear of the store theft prompts him to submit a horrendous ambush on his companion Gus. Greater submits both of the ruthless murders not in fury or outrage, yet as a response to fear. His ordinary dread stems from being trapped in the demonstration of doing something socially inadmissible and being the subject of discipline. In spite of the fact that he later admits to Max that Mary Dalton's conduct toward him made him detest her, it isn't that loathe which makes him cover her to death, yet a weak endeavor to avoid the discovery of her mom. The dread of being gotten with a white lady overpowered his presence of mind and directed his activities. At the point when he endeavored to kill Bessie, his inspiration came from extreme dread of the results of letting her live. Greater understood that he was unable to take Bessie with him or leave her behind and inferred that executing her could give her as it were kind end. The enthusiastic powers that drive Bigger are passed on by implies other than his words. Other than responses to fear, his activities illustrate a very speedy temper and damaging drive as an essential some portion of his inclination. Fury has a key influence in his essential nature, in any case, doesn't straightforwardly inspire the homicides he submits. Fierceness does not influence Bigger's insight and brisk reasoning and it becomes obvious during the meeting with Briton. The criminologist makes Greater so furious that the cross examination turns into a game to Bigger, a round of rationale and wills, of playing the moronic negro, and telling the man precisely what he needs to hear. The game Bigger plays during the cross examination shows his extraordinary insight and capacity to think rapidly on his feet. Greater likewise showed his knowledge in the formation of the payment note. Utilizing the circumstance to further his potential benefit, Bigger composed a payoff note to blackmail Mary's folks for cash. To make the note considerably all the more persuading furthermore, to prevent fault from himself, Bigger signs the note with the socialist image of a mallet and sickle. In spite of the fact that the book rotates around Bigger he has hardly any great characteristics, which get his terrible activities discredit, making him an wannabe. He have the fierce propensities to submit assault, blackmail of the dead young ladies guardians, burglarizing, and slaughtering guiltless individuals. These qualities don't depict a basic casualty of condition, yet a routine criminal carrying on against a society. While Bigger commands the story, his shocking activities make him a man that the peruser can not view as a legend. In truth the creator rebuffs the screw-up character by denouncing him to death for his wrongdoings. One of the two most thoughtful portrayals of white people in the novel originates from the character of Jan Erlone, Mary Dalton's companion. He displays an excited character and speaks to an optimistic youthful coordinator for the Communist party. Mary's guardians and their hireling Peggy doubt his thought processes. Greater at first communicates a dislike for reds when reacting to Jan's cordial advances during their first gathering. While accepting doubt from people around him, Jan holds a basic faith in the balance for all men, paying little heed to social class or race. All through Jan's first gathering with Bigger, he respects Bigger with the most extreme regard. Over the span of the night, Jan sits in the front of the vehicle with Bigger, eats with him, drinks with him, furthermore, addresses him as an equivalent. Those activities of equity depict in excess of a conventional man, it shows that Jan's character has a solid feeling of ethical quality and genuineness. Jan is likewise portrayed by other brave characteristics, absolution and comprehension. As an intriguing touch of destiny, Jan gets Bigger a lawyer, and shows that he could pardon Bigger for ensnaring him for Mary's hijacking. The second thoughtful white character, Boris A.

Social performance of Unilever an Example of the Topic Business Essays by

Social execution of Unilever Presentation: Need exposition test on Social execution of Unilever subject? We will compose a custom paper test explicitly for you Continue Each business house, regardless of how enormous or little it is, has some social obligations which are should have been met basically. The prime objective of a corporate house isn't just to maintain a beneficial business and use network assets for its own benefit, yet in addition to give satisfactory come back to the general public by taking dynamic part in the improvement of the general public inside which it works. A corporate house should regard and secure human rights and take productive measures to guarantee that they are not occupied with any caring occurrence identifying with maltreatment of human rights. Not just that, a business house ought to likewise work in a situation inviting way. It ought to guarantee that condition doesn't get disintegrated by its activity; rather it should take some viable measures so as to improve ecological conditions. The United Nation has likewise perceived social interest of corporate houses. It has made a tremendous stride in propelling the universes biggest activity for making corporate resident socially capable by presenting worldwide minimal in 2000 which authorized some general rules that corporate houses ought to follow so as to work in the worldwide market in an increasingly steady path and to manufacture progressively prosperous and thriving social orders. This worldwide conservative propelled by the United Nations really draws in players in the private parts to distinguish and spread great corporate practices in the territories of human rights, work rights, insurance of the earth, and hostile to defilement. (Rasche 2009, 513) The worldwide smaller remembers ten standards for the zones of human rights, work eight, condition, and anticorruption that a corporate house ought to follows. In the territories of human rights, a business house ought to broaden backing and regard the security of human rights inside the territory of its impact, and guarantee that they are not occupied with human rights infringement. In the event of insurance of work rights, a corporate house should offer appreciation to one side of aggregate dealing and the opportunity of work affiliation, ought to wipe out a wide range of mandatory or constrained work, should participate in viable cancelation of kid work, and ought to maintain a strategic distance from any kind of segregation as for business and occupation. Undoubtedly, every business house ought to embrace preparatory way to deal with address natural difficulties, should take activities for advancing more noteworthy duty towards condition, and ought to empower the turn of events and execution of condition benevolent advances. Lastly, in the territories of hostile to defilement, every business should take dynamic measures against a wide range of debasement including pay off and coercion. (Joined Nations 2010) This paper will attempt to break down how far one of the universes most famous corporate houses, Unilever, has performed towards meeting its social duties, as it were to state, this paper looks to inspect to what degree Unilever has been fruitful in following the standards of the worldwide minimized. Social execution of Unilever: Unilever is world well known worldwide organization that possesses a number prestigious brands in the market of food, home and individual consideration, drinks and so on. It works on a worldwide stage with a well persified item portfolio including acclaimed brand like Persil, Dove, Flora, Knorr and so on it for the most part makes food items alongside home and individual consideration items. Its market has become so colossal that its market has stretched out to upwards of 150 nations. It has an enormous representative base including 227,000 individuals around the world. It is completely global organization as in each mainland, with the exception of Antarctica, it has its plants and operational organizations. Throughout the years so as to broaden its market power it has been following the strategy for acquisitions and take overs. Through various enormous acquisitions it currently claims upwards of 400 brands. (Brands forever (Unilever 2010, 1)) Being such a huge corporate house, the corporate social obligation of Unilever is additionally expected to be enormous and it has properly perceived its duty towards the general public other than satisfying its benefit making objective. Be that as it may, acknowledgment of obligation isn't sufficient, rather it is important to concentrate more on those exercises which can help recognizing the organization as a socially mindful corporate house. In this way let us take a gander at the presentation of Unilever towards satisfying its social obligations. To the extent the companys obligations towards ensuring nature is concerned, the organization has made some successful strides towards creating its items in condition amicable manners. For instance, it has made some successful strides towards satisfying its responsibility of purchasing required palm oil from practical sources which are earth guaranteed so as to meet the necessity for its organizations in whole Europe, Australia and New Zealand. In 2010, the organization has had the option to make sure about adequate GreenPalm declarations for purchasing economical palm oil. GreenPalm is really a declaration program for exchanging palm oil which has been intended to handle a wide range of ecological and social issues that are related with he creation of palm oil. In any case, regardless of social occasion enough of GreenPalm declarations, the organization has been reprimanded by Greenpeace fro causing deforestation. In 2008, Greenpeace UK Accused Unilever for making sure about palm oil from those providers who delivered palm oil so that the rainforest of Indonesia got harmed. One of the palm oil providers of Unilever was additionally blamed for deforestation for the ranches of palm trees which undermined a types of monkey. (Natural manageability ((Unilever 2010, 1)) In spite of the fact that there are a few reactions and allegations against Unilever in the territories of natural issues, one essential point ought not be disregarded that in every one of these cases Unilever reacted in a positive manners via looking through viable strategies which ought to follow ecological standards. Truth be told, the endeavor of making sure about enough of GrenPalm authentications is a case of such an exertion. Aside from purchasing palm oil from earth affirmed sources, the organization has likewise made a crucial stride towards getting upset the tea business by making the responsibility of purchasing all its tea from moral and economical sources. Being the proprietor of the universes top of the line tea brand, Lipton, the organization targets getting all its tea packs ecologically confirmed in the worldwide market by 2015. This move denotes the initial step by any tea organization in acquire new reasonably ensured tea the market for an enormous scope. The organization has set up Lipton as a potential brand which can console its customer about the tea sources. It generally participates in improving the nature of the tea in a situation well disposed way. Notwithstanding, one thing ought not be overlooked that while the organization has attempting to make sure about its crude materials from economical sources so as to ensure condition, a few times it gets blamed for dumping of substance squander. For instance, Hindustan Lever, its Indian auxiliary, every now and again has censured for dumping substance squander even in those spots which are ensured nature saves. (Natural maintainability ((Unilever 2010, 1)) Despite having a few charges in the zones of securing condition, the organization has had the option to build up itself as the main organization which has put due consideration towards utilizing condition neighborly crude materials for its items. This would basically build markets for its items and make the organization increasingly productive and along these lines partner would now be able to get higher pidends. (Brammer, et al. 2005, p. 13) Unilever is additionally extremely dynamic towards stretching out assistance to the network inside the circle of its impact at the period of scarcity. For instance, on January 15, 2010, Unilever had made a fiscal gift of $500,000 in association with the United Nations World Food Program to the overwhelming earth tremor survivors of Haiti. The organization is, be that as it may, in some cases scrutinized for boosting prejudice through its promotions. For instance, in an ongoing notice of its skin helping item, reasonable and Lovely it demonstrates how a darker looking woman who used to be disregarded by her managers and other men out of nowhere gets appealing to all men and get impressive vocation, this promotion is by all accounts dampening for darker looking ladies. Not just that, the organization has additionally presented another frozen yogurt in Austrailia with the name Mohr im Hemd which was before utilized for a chocolate claim to fame so as to allude exposed wild Africans. The organization in any case, disproves such charges and claims that it has utilized the name after leading a wide market concentrate without having any basic input. (Regarding Rights (Unilever 2010, 1)) To the extent its duty towards ensuring work rights is concerned, some significant claims has been made against the organization, especially against its auxiliaries in India and Pakistan. These charges concerned the issues of utilization of kid work, site terminations, opportunity of work affiliations, and aggregate dealing. Where everybody is soughting for forbidding kid work, being one of the universes most eminent MNC, Unilever is blamed for utilizing kid work in its assembling units. This sort of occurrence may take the organization to the court which would not be generally excellent for its notoriety and partner may sell their stakes in the organization in the dread of awful results. Be that as it may, the organization has had the option to determine most the protests. ((Regarding Rights (Unilever 2010, 1)) To the extent the regions of securing human rights are concerned, the organization has made some viable strides. An exceptionally intriguing point to be noted here is

Meeting FAQ

Meeting FAQ Im in Southern California now, preparing for the following Central Meetings: Orange County: Wednesday, September 28 (tonight!), 7:00pm; Troy High School Auditorium, 2200 E. Dorothy Lane, Fullerton, CA 92831Los Angeles/Westwood: Thursday, September 29, 7:00pm; Hoffman Hall at Westwood Presbyterian Church, 10822 Wilshire Blvd, Los Angeles, CA 90024San Diego: Saturday, October 1, 2:00pm; High Tech High School Auditorium, 2861 Womble Rd, San Diego, CA 92133Los Angeles/Pomona: Sunday, October 2, 2:00pm; Theatre Building at California State Polytechnic University Pomona, Camphor Lane at Mansion Lane, Pomona, CA 91768San Luis Obispo, Wednesday, October 5, 7:00pm; Assembly Room at Ludwick Community Center, 864 Santa Rosa Street (at Mill Street), San Luis Obispo, CA 93401Los Angeles/Long Beach: October 6, 6:00pm; California State University Chancellors Office, 401 Golden Shore, Long Beach, CA 90802 At my Central Meetings, there are a handful of questions Im almost always asked. So, what Im going to do is answer three of the most frequently asked questions here and now, so that you dont have to ask (not that I mind questions). All of the below statistics are freely available on the MIT website. What are the early action statistics? Is it easier to get in if I apply early? Last year, early action [MyMIT]: 2794 students applied early action 384 students admitted early 2240 students deferred to regular action 267 deferred applicants admitted during regular action Last years overall statistics: 10,443 students applied 1,495 admitted We use the exact same criteria to evaluate and select early and regular action applicants. We do not give an edge or bonus points to those who apply early. We are committed to admitting no more than 30% of our class during the early action round. Students who are deferred to regular action are considered again and equally with regular action applicants. What scores should I get? Are my scores good enough? We do not make decisions based on test scores. There is no formula for admission, and there are no minimum test scores. Test scores are one of many parts of the application that inform our decision. Admissions decisions at MIT are made following a holistic, subjective review of each applicant. That being said, I know that folks are still (understandably) very concerned about test scores. To give you a sense of things, here are the middle 50% score ranges of students admitted to the Class of 2009 [MyMIT]: SAT I Verbal: [690, 770] SAT I Math: [740, 800] ACT Composite: [31, 34] SAT II Math: [740, 800] SAT II Science: [710, 790] SAT II Humanities: [700, 780] (Please remember that we are not considering the new SAT Writing test this year.) Also, its worth noting that more than 35% of students (370+ students) admitted to the Class of 2008 had SAT I Verbal scores lower than 700, and 11% (110+ students) had SAT I Math scores lower than 700 [CDS]. In the end, it is being a good fit match with MIT that makes the decision. Can I get AP/IB credit? Yes. Though the score that will give you credit changes year to year (this is set by the faculty and not by Admissions), here are last years required AP scores. Unless otherwise specified, the noted score provides 9 units of general elective credit. Art History: 5 Biology: 5 1 Calculus BC: 4 or 5 2 EconomicsMacro: 5 EconomicsMicro: 5 English Language: 5 English Literature: 5 European History: 5 French Language: 5 French Literature: 5 German Language: 5 Government PoliticsUS: 5 Government PoliticsComparative: 5 Human Geography: 5 Latin Literature: 5 Latin Vergil: 5 Music Theory: 5 Physics C: 5 on both parts 3 Psychology: 5 Spanish Language: 5 Spanish Literature: 5 US History: 5 World History: 5 1 Placement and 12 units of credit will be given for 7.012, Intro Biology. 2 Placement and 12 units of credit will be given for 18.01, Calculus I. 3 Placement and 12 units of credit will be given for 8.01, Physics I. and here are last years required IB scores. For the IB, we will only consider Higher Level (HL) subjects. Biology: 7 (placement and 12 units of credit will be given for 7.012, Intro Biology) Calculus: 6 or 7 (placement and 12 units of credit will be given for 18.01, Calculus I) Physics: 7 (placement and 12 units of credit will be given for 8.01, Physics I) A 7 on other Higher Level exams (except Chemistry and Computer Science) will generally give you 9 units of general elective credit. This page also outlines credit from other exams, including A Levels, the French Baccalur??at, and the German Abitur. You may also get credit and placement for courses through advanced standing exams or college transfer credit. I hope thats helpful to you. Ill be answering other questions here soon in an Omnibus format. And, for those of you in Southern California, I pose this question to you: Can you recommend any good and/or interesting restaurants? Nothing fancy, just some good food.

Exchange Rate Based On Economic Factors Finance Essay - Free Essay Example

Exchange rate movements can have significant impact on a companys return especially for multinational companies and companies that involved heavily in export and import of goods. A small change in exchange rate would impact directly to the companys performance. Therefore these companies often use derivatives securities such as options, forwards and futures to hedge or mitigate risk arising from exchange rate movements. Investors also use these tools to speculate and hope for profit from fluctuations in exchange rates. If investors predicted accurately on future exchange rate then this would provide a favourable return on their investment portfolio. In this paper, we will examine on how economic factors relate to exchange rate movements and use it to forecast. Firstly, we will look at four different types of exchange rate regime and how the exchange rate is determined. Next, we will examine Purchasing Power Parity (PPP) and we use it to calculate whether a currency is undervalued or overvalued. After that, we look at how Balance of Payment (BOP) could be one of the factors that influences exchange rate movements. Under BOP trade flow model, we use the trade flow and capital market participants to be the factors that determine the exchange rate equilibrium. We then use this model to predict future exchange rate movements when there is a shock in economic activity. Lastly, we will examine the relat ionship between official interest rate and exchange rate and use the interest rate differentials theory to predict future exchange rate. 1.1 TYPES OF EXCHANGE RATE 1.1.1 Free Floating Exchange Rate Regime Under this type of exchange rate, the value of a nations currency is fully determined by the market demand and supply in a freely competitive market. Under no government intervention in the exchange rate determination, the rate fluctuates purely based on the conditions of demand and supply. The benefit of choosing this type of exchange rate over fixed exchange rate regime is that the country will not suffer from balance of payments crisis because the currency will adjust accordingly and no reserves are being used to maintain its pegged value, but on the other hand, it causes lack of confidence to importer or exporter as the currency has the potential to fluctuate widely in a short period during period of turbulence. 1994 economic crisis in Mexico is a good example to explain balance of payment crisis due to its fixed exchange rate regime. Mexican peso had to be devalued immediately when Mexico government run out of its foreign reserves to maintain its fixed exchange rate regime, se e Whitt (1996). However, many nations will prefer managed floating exchange rate instead of free floating exchange rate as they can intervene the market and reduce the fluctuation of its currency. 1.2 Managed Floating Exchange Rate Regime This type of exchange rate is similar to free floating exchange rate, the monetary authorities or central bank will manage and control its fluctuation rather than simply leaving it to be set by the market. The central bank can alter its official interest rates or uses its reserves to influence the value of its currency in the short and long run. We will further discuss interest rates and BOP approach in chapter 2.2 and 2.3. 1.1.3 Fixed and Semi-Fixed Exchange Rate Regime Fixed exchange rate is often called as pegged exchange rate; the exchange rate is set at a declared par value and maintained by the authorities or central bank. The rate will not fluctuate in daily basis as the intervention from the authorities will fix the exchange rate by buying or selling its currency. The central bank must hold large foreign currency reserves to mitigate shocks in supply and demand. Third world countries often use fixed exchange rate to build confidence in investors and avoid bubbles in foreign market. Developing countries can use it to avoid out-of-control-inflation. In term of semi-fixed exchange rate regime, the value of a countrys currency is allowed to float between the permitted bands of fluctuation. Same as fixed exchange rate regime, central bank has to intervene in the foreign exchange market to ensure that the exchange rate stays within the specified bands and it can be done by buying or selling its countrys currency. In other words, central bank a cts as a dominant investor and has the ability to influence market exchange rate. However, the fixed exchange rate regime can backfire, if the foreign exchange market value of the currency is not reflected by the pegged rate. This will lead to investors to trade the currency in the black market; the currency will not be traded at the pegged rate, instead at market value. If the countrys currency were set its rate wrongly, take the case when central bank set its rate above equilibrium (an overvalued currency), in the long period of time, the monetary authorities will suffer from foreign reserves crisis. They must then either devalue their currency or change the regime from fixed to floating type of exchange rate. Please refer to Argentine economic crisis (1999 -2002) and Mexican peso crisis (1994) for a better understanding in the foreign reserves crisis. CHAPTER 2: FACTORS THAT INFLUENCE EXCHANGE RATE In this chapter, we first look at how Purchasing Power Parity (PPP) could be used to analyse the movements in exchange rate and hence predict future spot rate. The reason we start with PPP is that PPP perhaps covers the most fundamental approach to assess long-term value in the foreign exchange market. In order to develop more sophisticated models of exchange rate determination, we must first be able to grip a good understanding about the basic notion of PPP, theories and assumption of this approach. We look at three main types of evaluating a nations currency which are absolute purchasing power parity, real exchange rate and relative purchasing power parity. We then use them to determine whether the currency is overvalued or undervalued. Next, we consider balance of payment (BOP) approach in our study of movements in exchange rate. In this section, we begin with the BOP structure and classification and followed by BOP flow model of exchange rate determination. In this flow m odel, we first look at how trade flow determines the exchange rate equilibrium and later we combine with capital market participants to produce a more complete BOP flow model. We also examine in how exchange rate responds to a shock in economic activity based on the BOP flow model. We look at interest rates as predictor of exchange rate movements in section 2.3. We start with two fundamental interest rate hypotheses which are covered interest rate parity (CIP) and uncovered interest rate parity (UIP) and use them to determine the expected rate of depreciation or appreciation of a currency. Next, we discuss about how interest rate differentials cause movement in capital flow from one country to another and hence affect the exchange rate. 2.1 PURCHASING POWER PARITY (PPP) PPP is one the oldest method to forecast the long-term value of a foreign exchange and the foundation of PPP is based on the assumption of law of one price. Law of one price simply states that in an efficient market, all identical tradable goods must only have one price. This law implies that exchange rates should be adjusted to compensate for price differentials across nations; price of goods and services should cost the same in all nations when prices are measured in a common currency. However, law of one price does not always hold especially in the short time frame. At a point in time, the price for the same item in different market may not be unique if the price measured in a single currency. Antweiler (2009) stated that changes in exchange rate in the short run are news-driven whereas PPP describes the long run behaviour of the exchange rate. The economic forces behind PPP will eventually even out the differences in purchasing power of currencies. As mentioned earlier, we only consider the long-term value of the exchange rate in this paper hence this problem will no longer hold as the price will adjust accordingly. PPP divided into two categories, absolute purchasing power parity and relative purchasing power parity. 2.1.1 Absolute Purchasing Power Parity In order to derive the equation for absolute purchasing power parity, firstly we need to use the assumption of law of one price to equate price of one good expressed in two different currencies. Equation (2.1) holds with respect to all tradable goods and services consumed in two countries. Pi is the price of i good and service in domestic country and with asterisks is the price of goods and services in foreign countries. S is the nominal exchange rate between the domestic country and foreign country, expressed as price of a unit of foreign currency, measured in units of domestic currency. However, we assumed that there are no transaction costs such as transportation and tariffs in equation (2.1). It will be more appropriate to calculate the estimated exchange rate based on PPP if we use a basket of tradable goods and services as our measurement in both countries instead of a single tradable good. P and P* refer to the domestic and foreign countrys price of a basket of tra dable goods and services. Equation (2.2) is often called absolute purchasing power parity. Absolute purchasing power parity follows the proposition that a group of tradable products will have the same cost in every country if the costs are converted in a common currency. If the nominal exchange rate calculated based on equation (2.2) is greater (lower) than the actual exchange rate, it suggests that the domestic currency is undervalued (overvalued) against the foreign currency. 2.1.2 Real Exchange Rate PPP however does not always hold in practice, in this case, many economists wish to measure deviation from PPP and the most popular method used for this measurement is called real exchange rate: Real exchange rate, Q, is defined as the nominal exchange rate that takes inflation differential between two currencies into account. For the simplicity, we use Big Mac, the McDonalds sandwich, as our example to explain how economists use this approach to determine whether one currency is overvalued or undervalued. Let the United Kingdom and the United States be the domestic and foreign country used in our example. We also assume it costs pound;1 to buy a Big Mac in United Kingdom, UK and $1.5 in United States, US. In this case nominal exchange rate is said to be 0.667 (pound;1 = $1.50). If absolute PPP holds, then the value for Q is said to be one; the burger would cost the same in United States and United Kingdom since the burger is identical in both countries. However, if nominal exch ange rate remains constant, i.e. pound;1 = $1.50, and Big Mac costs pound;1.2 in United Kingdom, this implies that it costs 20 percent more in United Kingdom, suggesting that the pound is overvalued by 20 percent relative to US dollar, hence the absolute PPP no longer holds (Q is not equal to one). In this case, there will be an upward pressure on the demand for US dollar; one would buy the burger in US at the price equal to 1 pound (pound;1=$1.50) instead of buying it in UK which costs pound;1.20. Increase in demand for US dollar causes upward pressure on the nominal exchange rate until the price in US and UK is the same, the real exchange rate returns to 1. To further our study on Big Mac, in table 1, page 11, we show the prices of Big Mac in 17 countries expressed in term of US Dollars based on the actual exchange rate as of 4 July 1995. Since the Big Macs are identical, whether purchased in Sydney, San Francisco or Tokyo, they should theoretically cost the same or at least ro ughly the same price according to the law of one price. The Economist magazine found out that the law of one price does not hold when applied to Big Mac, as substantial deviations from PPP exist. Nevertheless, Cumby (1993) study the behaviour of Big Mac prices in 25 countries over seven-year period starting from 1987. The study found that 70-percent of the gap between actual exchange rate and their estimated Purchasing Power McParity values was removed. Purchasing Power McParity works exactly the same as PPP, instead of using a basket of tradable goods and services, it uses Big Mac index which published by The Economist. Table 1 Currency Big Mac Price Implied PPP of the US$ Actual Exchange rate % Over (+)/ In Local Currency In US Dollar Terms as of 4/7/95 Under(-) Valuation Hong Kong Hk$9.50 1.23 4.09 7.73 -47 Indonesia 3900 1.75 1681 2231 -25 Australia A$2.45 1.82 1.06 1.35 -22 Canada C$2.77 1.99 1.19 1.39 -14 Singapore S$2.95 2.10 1.27 1.40 -9 US $2.32 2.32 Italy Lire 4500 2.64 1940 1702 +14 Britain pound; 1.74 2.80 1.33 1.61 +21 Spain Pta 3.55 2.86 153 124 +23 S. Korea Won 2300 2.99 991 769 +29 Holland FI 5.45 3.53 2.35 1.55 +52 Sweden Skr 26.0 3.54 11.2 7.34 +53 Belgium Bfr 109 3.84 47.0 28.4 +66 France FFr 18.5 3.85 7.97 4.80 +66 Germany DM 4.80 3.48 2.07 1.38 +50 Japan  ¥391 4.65 169 84.2 +100 Denmark Dkr 26.75 4.92 11.5 5.43 +112 Source: McDonalds; The Economist, April 15, 1995 2.1.3 Relative Purchasing Power Parity There is another way of measuring real exchange rate which is known as relative purchasing power parity. As before, it measures the relationship between two countries relative inflation rates and the change in the exchange rate, we then use it to predict the future exchange rate. Relative purchasing power parity is defined as the rate of change in price level of a basket of tradable goods and services in one country relative to the price level in another determines the rate of change of the exchange rate between the two countries currencies. Equation (2.4) is obtained by taking logs of Equation (2.2) and the reason of doing so is one could measures the exchange rate in term of rates of growth when we apply derivative on natural logarithm (equation (2.5)). In equation (2.4), s is defined as the log of nominal exchange rate, p and p* represent the log of price in domestic country and foreign country. Next, if we apply derivative on equation (2.4), we arrived at the proportiona l rate of change, which is also known as relative purchasing power parity. The equation as above says that rate of change of currency, ds is equal home countrys inflation rate, dp minus foreign inflation rate, dp*. One way to interpret this relationship is simply saying when prices rise more rapidly in home country than foreign country then it is said that the domestic money losses its value relative to the foreign money or decrease in exchange rate, and vice-versa. Equation (2.5) is also valid for relaxing the assumption of no transaction cost when the transaction cost is proportional to the value of the goods. Take logarithm in Equation (2.6) we have: Since k is a constant, we end up with the same result as equation (2.5) simply because it vanishes when we differentiating a constant, k. In other words, proportional transaction costs have no effects on the relative purchasing power parity. In this section, we discussed how price differentials could be related to nominal exchange rate. Investors could use equations (2.2), (2.3) and (2.5) to predict the future spot rate movements. It is difficult to measure the change in price of a basket of tradable goods and services in both countries, therefore investors often use Consumer Price Index (CPI), Export Price Index (EPI) or Import Price Index in evaluating the estimated exchange rate based on these equations and make appropriate investment decision. In graph 1, we show a strong positive correlation between YEN ¥/USD$ exchange rate and Japan export prices (all commodities) from 2001 to 2010. However, the drawback of using Japan Export Price Index (EPI) is that EPI unable to tell us about the magnitude of the change in exchange rate corresponded to a unit change in export price. We note that the magnitude of the change in YEN ¥/USD$ exchange rates do not correspond well to the Japan export prices in year 2008 and this might be reason of the effect on global financial crisis in year 2007 to 2010. There are number of debates in the international economics on the issue of whether PPP is a valid tool for forecasting exchange rate. PPP could be calculated based on CPI, EPI, wholesale price indexes, wages or other set of price or cost indexes. Unfortunately, each approach may provide different set of answers as to whether a currency is undervalued or overvalued and this might lead to disaster investment decision if an investor chose a wrong set of index. In the effort of calculating relative PPP, we cannot fully rely on the set of price indexes as different countries may have different national preference and tastes, and hence different weight in their price indexes. Therefore, if two nations preference and tastes are not in common, using price indexes may not be the best approach to forecast its exchange rate. Apart from choosing appropriate set of price indexes, there is another problem called the base-year problem. Selecting different base-year could end up the same puzzle as before. However, this problem could be resolved by selecting the base year when both countries current account balance last attained is near zero. 2.2 BALANCE OF PAYMENTS (BOP) The BOP model of exchange rate determination was originally developed in the 1930s and 1940s by Robinson (1937), Machlup (1939), and Haberler (1949). In this section, we explain the meaning of BOP and its accounts, current account and capital and financial accounts. Next, we look at the basic model of BOP which only considers trade flow as the determination of exchange rate then we slowly develop to more complete BOP flow model which able to tell us the future exchange rate movements for a given shock in economy activity. 2.2.1 BOP Structure and Classification BOP is defined as a statistical statement that systematically summarises, for a specific period, the economic transactions of an economy with the rest of the world by IMF (please refer to IMF Balance of Payments Manual, Fifth Edition, Chapter 2 Conceptual Framework, page 6). The transactions refer to receipts and payments of all of the money coming in a country from abroad and going out from the country to abroad for a specific period. Examples of these transactions are payments for the countrys export and imports of goods, services and financial capital. Transactions that lead to a receipt of payment from foreigners (payment to foreigners) are recorded in the BOPs accounts as a credit (debit). BOP accounts are divided into two broad part, current account and capital and financial accounts. Current account deals with payments for import and export goods and services, income from abroad such as interest and dividends, and transfer payments. In order to figure out whether the bala nce of the current account of a country has a deficit or a surplus, one can calculate it using the equation as follow (IMF Balance of Payments Manual, Fifth Edition, Appendices, page 158): In other words, current account balance (CAB) is equal to the sum of net value of exports (X) and imports (IM) goods and services, net income abroad (NY) and net current transfer(NCT). A surplus of CAB indicates that the economy of a country being a net creditor to the rest of the world. This means that the country is providing resources to other economies more than it received, in return, they owes money to the country. This situation is often called as favourable balance and it indicates that there is an upward pressure on demand of the countrys currency, which leads to an increase in the value of the currency. On the other hand, deficit of CAB mirror the economy of a country being a net debtor to the rest of the world. It is said that the country is investing more in its country than saving and it uses resources from other economies to meet its domestic consumption and investment requirements. On the other part of BOP, capital and financial accounts which record the transactions related to international movements of ownership of financial assets. One can easily break capital and financial account into four categories; direct investment, portfolio investment, other investments and reserves account, refer to IMF Balance of Payments Manual, Fifth Edition, Chapter 3 Structure and Classification, page 77. Direct investment records the transactions on long term capital investment, such as purchase of fixed assets in foreign countries or domestic country by any residents or non-residents. Portfolio investment is referred to the transactions of buying or selling shares and bonds in financial markets. Other investments are referred to capital flows into banks or banks provide loans to residents or foreign investors. After the initial investment, any incomes or interest re payments generated by these assets are recorded in the current account. Reserve account is controlled by monetary authorities and these reserves are used for financing or regulating payments imbalances or for other purpose, refer to IMF Balance of Payments Manual, Fifth Edition, Chapter 3 Structure and Classification page 80. Any payment imbalances will usually lead to change in the holding of reserves as monetary authorities will use it for official market intervention to influence the spot rate. If a domestic resident purchased (sold) foreign assets or foreign resident sold his/her (purchased) assets in the domestic economy then it is referred to be capital outflow (capital inflow) and it is recorded as debit (credit) entry in capital and financial accounts. 2.2.2 BOP Flow Model In this section, we will use BOP flow model to determine and affect the value of an exchange rate. We will first be looking at the simple trade flow model of exchange rate determination and how do monetary authorities intervene in the foreign market under fixed and semi fixed exchange rate regime to manage its exchange rate. Next we will include capital market participants into our consideration of modelling exchange rate equilibrium and predict future spot rate movements. We also examine in how exchange rate respond to a shock in economy or large capital movements. The diagram above shows us how the equilibrium MYR/US$ exchange rate is determined under three different exchange rate regimes. On the vertical axis, we plot the MYR/US$ exchange rate and on the horizontal axis we have the quantity of US dollar printed by US government in a specific time frame. In this model, we shall only consider the demand of US dollar (D$) is affected by the Malaysian demand for US goods. To expl ain this, Malaysian residents must first exchange Ringgit Malaysia in the foreign exchange market before they could make payments for the US goods they wish to purchase. In the same vein, the supply of US dollar (S$) is only affected by the demand of Malaysian goods by US residents. In the free floating exchange rate regime, if the demand and supply for dollars is only affected by the trade flows, it should be in the equilibrium point (QE,E2) at all time, which is the intersection between supply (S$) and demand (D$) for dollars. To explain this phenomenon, if we look at the exchange rates above equilibrium, there is an excess of supply of US dollar (S$) and market will push the exchange rate down to equilibrium point, and vice-versa. Let us assume that the exchange rate regime between MYR and US Dollar were semi fixed and the permitted band of fluctuation was E1 and E3. If the equilibrium exchange rate is within the bands therefore no intervention by central bank is required. If the demand shifted above (below) the allowed band of fluctuation,D1$ (D2$), then the central bank must sells (buys) its own currency on the foreign exchange market and restore the equilibrium within the band. In the fixed exchange rate regime, if the MYR/US$ exchange rate were pegged at an artificially high level such as E3, then flow supply for dollars would exceed the flow demand of dollars and the gap between A an B would be the markets excess supply for dollars (QB -QA). In order to maintain at the level E3, the central bank must then buys its own currency on the foreign exchange market in return for the currency to which it is pegged. Graph 2 shows the spot rate between Malaysia and US (MYR/US$) for the period between 1st January 2004 and 31th December 2007. Between 1998 and 2004, the exchange rate between MYR and US Dollar was pegged wrongly at the rate above market equilibrium, 3.80 ($1=MYR 3.80) by Bank Negara Malaysia, Talib (2004). On 21th July 2005, Malaysia and US government agreed to remove this pegged regime and adopted managed float exchange rate regime. Since then, the value depreciated significantly and this indicates that the spot rate was pegged above the market equilibrium. In the BOP model, capital flows are important in analysing the exchange rate movements, especially in the short and intermediate-term horizon, Siourounis (2003). The diagram below shows how capital market participants could influence the value exchange rates. For the purpose of analysing, we divide capital participants into two groups; one seeking for capital gains (currency speculators) and other one is seeking for interest rate differentials (international investor). In the following section, we look at the model on how currency speculators influence the exchange rate whereas the interest rate differentials as a model to predict exchange rate movements will be discussed in section 2.3.3. The diagram above shows the exchange rate correspond to the demand and supply of dollars provided by currency speculators. On the right (left) side of vertical axis, the SP$ represented the supply (demand) of US dollars provided by currency speculators. Let the current spot rate MYR/US$ be the point where SP$ intersects y axis, Ee. If speculators predict the expectation of future spot rate be more than Ee, say E2, then currency speculators will convert Ringgit Malaysia to US dollars at the present and it convert back when the market rose above the current equilibrium point. In other words, currency speculators will be willing to supply more of US dollars in the future if the expected spot rate lies above Ee. The opposite case will be the same if expected spot rate lies below Ee. Complete BOP flow model of exchange rate determination is obtained by combining BOP trade flow model of exchange rate determination, diagram 1, currency speculation and exchange rate determination, diagram 2 and interest rate differentials as a model of exchange rate det ermination, diagram 5. This model allows us to study the interaction of commercial traders and capital market participants set the equilibrium level of spot rate. Diagram 3 (a) is the copy of the trade flow model shown in diagram 1 where exchange rate is determined by only trade demand and supply of US dollars. In order to capture the gaps between trade demand and trade supply we plot excess commercial demand curve for dollars, ED$ in diagram 3 (b), (D$-S$) and relate it to the supply of US dollars curve, SP1$. SP1$ curve is influenced by capital market participants, which consist of international investors and currency speculators. Plot ED$ and SP1$ in a same graph, we obtain the complete BOP flow model of exchange rate determination. In this model, the new equilibrium level of exchange rate is obtained by finding the intersection point between ED$ and SP1$. In other words, it is the intersection point between the net supply of dollars provided by capital market participants and the excess of commercial demand for dollars by commercial traders. However, investors are more interested in how exchange rates respond to shift in domestic and foreign economic activity, change in market expectations of future spot rates and independent shift in trade flows. Using BOP flow model of exchange rate (2), diagram 4 allows us to predict the future exchange rate movements and its direction caused by these shocks. Let us assume the SP2$ and ED1$ be the current supply and demand for US dollars respectively and the corresponding spot rate is at E1. If there is an increase in Malaysian economic activity (case 1), more Malaysian residents are willing to spend, this would imply that a relative increase in Malaysian demand for US goods and services. In turn, it causes an overall rightward shift of excess commercial demand for US dollars from ED1$ to ED2S. The market will respond to the change in Malaysian economic activity and restore its equilibrium at a higher rate, E2. In other words, greater amount of US dollars are injected by Malaysian residents whilst the supply curve remains constant, this caused an increase in the equilibrium spot rate. For the increase in independent trade flows, it will be the same explanation as increase in Malaysian economic activity. In case 2, we assume there is a positive shift in the market expectation of future spot rate and this positive shift would immediately impact the exchange rate. An upward shift in market expectation on the long run equilibrium would shift SP2$ upwards to SP3$, positive shift in capital market participants demand for foreign exchange resulting an immediately appreciation in the spot rate. Siourounis (2003) shows the empirical evidence for a positive shock to net purchase of US equities by UK, Germany and Switzerland have a significant and immediate effect on exchange rate that lasts between 10 and 17 months. In graph 3, we show there is a significant trend between USD$/AUD$ exchange r ate and Australias current account seasonally adjusted. However the exchange rate does not always associate with the Australias current account balance especially in year 2003 to 2004. This could be the reason when Australia became the host for Ruby World Cup (RWC) 2003. URS Finance and Economics (2004) stated that the results of this event contributed to additional economic activity in the short term throughout the Australian economy in terms of industry sales, employment, GDP and Government revenue. However, URS Finance and Economics (2004) also stated that after 2005 any RWC 2003 influence would have diminished on international visitors. We also note that gap between Australias current account seasonally adjusted and its exchange rate was diminished as well. In graph 4 shows the connection between GBP/MYR exchange rate and Malaysias current account balance. Starting from 2003, the exchange rates move along in the same direction with the movements in Malaysias current account b alance; however, this trend is not as significant as in graph 3. Nevertheless, investors could still use this approach to forecast exchange rate. 2.3 INTEREST RATES In this section, we look at the two main forms of interest rate hypothesis, covered interest rate parity and uncovered interest rate parity. Next, we look at the interest rate differentials as a model to predict future exchange rate movements and how it relates to capital movements from one country to another. 2.3.1 Covered interest rate parity (CIP) To explain the meaning of covered interest rate parity, we shall only consider that investors can either invest in UK (domestic country) or US (foreign country) fixed deposit. Let the UK fixed deposit and US fixed deposit rates be r and r* respectively. For simplicity, we assume that the investor can only convert his/her wealth through a 12-months forward exchange rate if he/she decided to invest in US fixed deposit. On the other hand, if the investor has decided to deposit pound;1 for 12 months in a UK bank which guarantee r interest at the end of the period. Then the pound;1 will accumulated to: For the cases when investor decided to invest pound;1 in US fixed deposit then at the end of 12 months period the pound;1 will accumulate to: Let F denote the forward exchange rate and S be the current spot rate, both measured in the unit of sterling price, (GBP per 1 unit of USD). Under no transaction costs and no arbitrage assumptions, equation (2.10) and equation (2.11) should be equal. We can rewrite the ratio F to S in a linear form. Where f is defined as the forward premium (discount), the ratio by which a countrys (UK) forward exchange rate to another (US) exceed (falls below) its spot rate. We can then substitute equation (2.13) to our equilibrium condition in equation (2.12) and express it as follow: Note that we can subtract one from both sides and r*f is the product of interest rate and forward premium (discount). In general cases, we can easily ignore the last term without affect the equilibrium condition as it is the second order of smallness, unless we are dealing we hyperinflation country then this term can not be ignored as it will be significant in measuring the equilibrium condition. Equation (2.15) states that the domestic interest rate must be higher (lower) than the foreign interest rate by the amount equal to the forward discount (premium) on the domestic currency; this is also known as covered interest rate parity hypothesis. However, empirical evidences show that equation (2.13) does not always hold precisely for the given interest rate differentials and forward premium as it contains transaction costs. In fact, for the fixed exchange rate regime, most researchers found out it felt within a specific bound. We define c to be the cost of carrying out the transaction. The absolute value c is too small that one can not justify it as an unexploited profit opportunity and hence the no arbitrage assumption is still valid in this case. Taylor (1989) studied the unexploited profit opportunities in three different types of economics, stable period, period of turbulences and later period of turbulences of an economic. He concluded that there is no unexploited profit opportunity to be found during the stable period in foreign exchange and this indicates that market is in efficient. He also noted that there is potential to exploit profitable arbitrage opportunity during periods of turbulences. In the later period of turbulences, frequency and size of the profit opportunities in the market had decreased significantly and this suggest that efficiency of the market had increased over time. 2.3.2 Uncovered interest rate parity (UIP) In the covered interest rate parity, we restrict investors to invest in foreign country by changing his/her currency through forward contract whereas in uncovered interest rate parity we do not restrict them. Therefore, investors bear the exchange rate risk as they are not guaranteed the value of exchange rate at the end of 12 months period. As equation (2.12), we replace F by Se where Se represents the expected spot rate at the end of 12 months period. Note that the ratio Se/S is not known; unlike in the equation (2.12), all variables are known at the present. The ratio can be greater (lower) than one if the expected spot rate is higher (lower) than the current spot rate. We can rewrite the ratio as follow: We define ?Se to be the expected rate of depreciation or appreciation of the domestic currency over the 12 months period. Substituting equation (2.17) into equation (2.16), we obtain: As before, we ignore the final term, r*Se in equation (2.18) The equation ab ove states the domestic interest rate must be higher (lower) than the foreign interest rate by the amount equal to the expected rate of depreciation (appreciation) of the domestic currency, this is also known as the uncovered interest rate parity hypothesis. 2.3.3 Interest Rate Differentials as Predictors of Exchange Rate Changes Has been mentioned in the previous section, we will look at how international investors react on the interest rate differentials and hence influence the change in exchange rate. Same as before, we assume a two-country world economy consist of United States and Malaysia. We also assume that investors will invest their wealth in Malaysia if the interest rate in Malaysia is higher than in United State, and vice-versa. Diagram 5 shows the relationship between interest rate differentials and the capital movement between two countries. At the point (iUS iMY)2, investors are indifference if they invested their wealth in Malaysia or United State; the interest in both country is the same. However, when the official interest rate set in United State is higher (lower) than in Malaysia, (iUS iMY)3, then investors will inject more capital into US (Malaysia) from Malaysia (US) as they could earn a higher rate of return. In the second part of the diagram shows the relationship between the size of the change in the spot rate and capital flows.   The slop represents the sensitivity of exchange rate towards capital flow; the higher it is the greater the magnitude of the change in spot rate towards capital flows. In reality, equation (2.20) does not always hold as the expected change in exchange rate predicted by investor does not always match with the spot rate at 12-months period. Therefore, we introduce u as the predictor error in equation (2.21). In evaluating the interest rate differentials as predictors of the change in exchange rate, investors have to measure the size and the direction of the predictor error. Mussa (1979) stated that the interest differentials explain little on the changes in exchange rates; therefore one has to include predictor error when evaluating the change in exchange rate. Graph 5, Appendices shows a positive relationship between MYR/GBP spot rate movements and the difference in interest rate between United Kingdom and Malaysia, (IUK- IMYR). Based on these data, if an currency speculator wishes to predict the future spot rate and he is considering interest rate differentials be the only factor that influences spot rate; he will exchange sterling pound for Ringgit Malaysia at the present and convert back to sterling pound in the future to obtain capital gain as the spot rate has the tendency to drift downward. Conclusion This paper found out that the relative change in price in the short run for both countries with respect to the nominal exchange rate does not hold when we use law of one price. Changes in exchange rate in the short run are news-driven and law of one price is valid when we measure the change in the long run. We also showed that prices of Big Mac in 17 countries did not cost the same price when we measured in term of US dollars. In the long run, studies showed that the gap between actual and estimated exchange rate using Purchasing Power McParity was removed. The real exchange rate is said to be equal to one if the absolute purchasing power holds when we measure the prices in both countries with respect to the nominal spot rate. Under the BOP model, if the spot rate were pegged at the rate above its equilibrium then the central bank would have to buy its own currency on the foreign market in return for the currency to which it is pegged. In corporate to this, we look at the case w hen Malaysia and United State removed the fixed exchange rate regime and adopted managed float exchange rate regime, the exchange rate depreciated significantly. We also discussed how capital market participants react and influence the exchange rate when there is a shock in economy activity. In the interest rates section, we discussed the meaning of covered interest rate parity and uncovered interest rate parity; we then use them as predictor of exchange rate changes. In driving these two hypotheses, we use no arbitrage opportunity assumption. However, studies showed that during period of turbulence there is potential to exploit profitable arbitrage opportunity whereas in the stable period there is no unexploited profit opportunity which indicates that market is in efficient. We also discussed how interest rate differentials will influence capital movements and its sensitivity. If interest rate in domestic country is higher than in foreign country then it will cause capital flow into domestic country by international investors. We also concluded that the greater the sensitivity of change in spot rates towards capital flows, the greater the magnitude of the change. We also showed that there is positive trend between YEN ¥/USD$ exchange rate and Japan export prices (All Commodities), USD$/AUD$ exchange rate and Australia current account seasonally adjusted, GBP/MYR exchange rate and UK current account seasonally adjusted, MYR/GBP exchange rate and interest rate differential.

Pros And Cons Of Free Trade Essay - 3046 Words

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